 | | Glen Hodgson
Senior Vice-President and Chief Economist
Forecasting and Analysis |
One of the questions frequently asked of economic forecasters during a recession is “have we reached the bottom?” A few weeks ago, we wouldn’t have touched that question with a bargepole. Indeed, a national business newspaper quoted us as saying that you had to be very bold or very stupid to say we had reached bottom. Which forecaster wants to look foolish by calling the bottom, only to have more evidence emerge that the economy is still in decline? But we at the Conference Board of Canada are now ready to contend that the bottom has been reached -- in terms of consumer psychology.
The key measure in calling the psychological bottom, boldly and hopefully not too foolishly, is consumer confidence – and The Conference Board produces widely-recognized consumer confidence surveys in Canada and the United States. The Canadian results show that consumer confidence climbed in April to an index score of 75 (where 2002 = 100). Canadian consumer confidence dropped sharply late in 2008, bottomed out in January and has increased by a material degree since then. To compile the index, we survey over 2000 Canadians each month across all regions of the country, as we have been doing for almost fifty years. We are confident in the robustness of these results since there is a meaningful correlation between the consumer confidence index and consumer spending behaviour going forward.
The U.S. consumer confidence score for April is even more striking. The U.S. index is based on a different methodology than that used for Canada. It had reached an all-time low of 25 in February (1985 = 100), an indication of how badly Americans were feeling due to the combined impact of falling housing prices, lower equity markets, weak wage gains and the growing fear of job loss. However, the U.S. index has now rebounded for the past two months, springing back by 12 points in April to an index score of 39. It would take a significant decline in the economy to pull U.S. consumer confidence back down to the all-time low, and we don’t see that decline happening – even with the current pandemic concerns.
Indeed, there is growing evidence that the overall rate of economic decay has slowed significantly. Parts of the U.S. economy, like the housing sector, are fast approaching the point of recovery. The rebound in consumer confidence, in combination with the growing number of other positive indicators, is consistent with our forecast that the Canadian and U.S. economies will both return to positive economic growth later this year.
Make no mistake: the entire economy has not yet reached bottom. There will continue to be bad news stories, and jobs will contract for a number of months to come. Private investment in particular has been hit very hard by the loss of access to credit, and by the collapse last fall of U.S. end- demand in key sectors like autos and housing. The sharp drop in commodity prices has added to the loss of real income, especially in Canada. We only expect a return to overall economic growth toward the end of 2009 when the combined effects of deep monetary accommodation, fiscal stimulus, and renewed access to credit have had a chance to work their way through the economy.
Nevertheless, the recent consumer confidence results for both the U.S. and Canada point to consumer attitudes being on the path to recovery. Consumption is about 70 per cent of U.S. GDP and 60 per cent of Canadian GDP, so this is a very positive and necessary sign – and a key reason to expect that we have now reached the bottom, psychologically.